What is an RRSP?

RRSP is an acronym for Registered Retirement Savings Plan. RRSPs are the Canadian government’s plan for citizens to save money for retirement.

Who Can Set Up an RRSP?

You are under the age of 71 as of Dec 31, 2008

You have contribution room – see below

You file an income tax return with the Canadian government

Two RRSP Tax Benefits:

1. Tax-Deferred Growth 

All investments within an RRSP account grow tax-deferred. This means that any profits made on investments within an RRSP account in the form of interest, dividends, or capital gains are not immediately taxable to you as income. There is a difference between tax-deferred and tax-free. Deferred means that although you don’t pay tax at the time the income ids earned you will pay tax when you take money out of your RRSP.  You have to pay tax on every withdrawal—but you don’t have to pay any tax until you with withdraw from the savings plan.

2. Income Tax Reduction Now

The second major tax benefit comes in the form of a tax savings now. You are allowed to deduct the amount of your RRSP contribution from you earned income; therefore, reducing your tax bill.

There are Limits

The maximum amount that you can contribute to an RRSP to be deducted is called the “RRSP deduction limit”. Your deduction limit is found on your Notice of Assessment or Notice of Reassessment from Canada Revenue Agency. Your 2009 limit would be on your 2008 Notice. The deduction limit is calculated as:

18% of your earned income for the previous year, up to an annual dollar limit.

The maximum RRSP deduction limit for 2008 is $20,000, and it is projected to increase to $22,000 by 2010:

2008 maximum RRSP deduction limit: $20,000

2009 maximum RRSP deduction limit: $21,000

2010 maximum RRSP deduction limit: $22,000

Deadline

You have until March 2, 2009, to make a deductible contribution for 2008.